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Tuesday, February 5, 2008

LONDON (Thomson Financial) - The dollar rebounded against the euro and the pound, with the falls in the wake of a woeful survey on US services sector activity proving short-lived on the widely accepted view that the slowdown is not confined to the US.

The US ISM non-manufacturing business activity index tumbled to 41.9 in January from 54.4, confounding forecasts for a much smaller fall to 53.0 and the worst reading since the aftermath of the Sept 11, 2001, terrorist attacks. The new composite index -- derived from detailed questions on new orders, employment and so on -- was only a little better, falling to 44.6.

The fall also takes the index way below the 50 level that marks contraction in the sector.

"While today's report is the second major confirmation that the US economy is in recession, the US dollar remains little fazed on the premise that the US slowdown is less likely to be isolated," said Ashraf Laidi at CMC Markets.

Earlier today, the PMI index on euro zone services showed the sector close to contraction in January, with the final estimate revised down sharply to 50.6, the weakest level in four and a half years.

The euro fell to a 12-day low against the dollar of 1.4630 usd after short-lived rises in the wake of the US ISM release.

With renewed falls on equity markets and a rise in risk appetite, however, one currency to benefit was the low-yielding yen, often seen as a default safe-haven currency, along with the Swiss franc.

"Renewed declines in equities are expected to drag down risk appetite, which should further weigh on the high yielding currencies against the dollar, leaving dollar/yen as the main dollar pair under pressure," Laidi said.

The market will also be keeping half an eye out for the results in the US primaries later tonight.